The latest operational, market, and technological challenges for loyalty management systems

1. Cards the way we see it
Next Generation Loyalty
Management Systems: Trends,
Challenges, and Recommendations
The latest operational, market, and technological
challenges for loyalty management systems

2. Contents
1 Highlights 3
2 History of Loyalty Programs 4
3 Loyalty Program Design 6
4 Key Operational Challenges in Loyalty Management:
Improvement Opportunities 8
4.1 Operational Trends in Loyalty Program Offerings 8
4.2 Key Operational Challenges and Recommendations 9
5 Recent Market Trends and Regulations:
Impact on Loyalty Economics 12
5.1 Market Trends Affecting Card Loyalty Programs 12
5.2 Key Market Challenges and Recommendations 13
6 Emerging Technology Trends: Implications for
Financial Services Institutions 17
6.1 Technology Trends Driving Changes in Loyalty Programs 17
6.2 Key Technological Challenges and Recommendations 18
7 Loyalty Management Solutions for Financial Services Institutions 21
7.1 Point-of-Sale Solutions 21
7.2 Back Office Solutions 22
8 Conclusion 23
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3. the way we see it
1 Highlights
Loyalty or rewards programs have become an essential feature for all debit and
credit cards1, and many card-issuers now maintain a growing portfolio of several
debit- and credit-based loyalty programs. There are a host of loyalty programs that
cater to almost every segment of the population with different lifestyle-based reward
options for different customer segments.
Loyalty programs are specifically designed to reward customers for past purchases
and to provide them with incentives for making future purchases. A rewards
program enables retention, cross-selling, and increased customer penetration while
providing a strong value proposition to the customer. These programs can also help
firms drive profitable customer behavior, enhance consumer spending, and provide
valuable data on consumer trends.
During the last decade, the payment card industry has grown significantly in size
touching $6.4 trillion in terms of transaction value by 2009—a growth rate of 8.9%
from 2005.
Exhibit 1: Global Card Market by Transaction Value (€ Billion), 2005-2009
CAGR (’05-’09)
8.9%
8,000
6,418
5,916
Transaction Value (€ Billion)
6,000 5,635
5,269
4,560
4,000
2,000
0
2005 2006 2007 2008 2009
Source: Capgemini Analysis, 2011; World Payments Report, 2011, Capgemini
1
Prepaid cards are out of scope in this analysis of the card market
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 3

4. Spending on loyalty programs has also seen a corresponding growth. For example,
spending on loyalty programs by U.S. financial institutions is expected to reach
$22.7 billion by 2013—a growth rate of 10.6% from 2010.
Exhibit 2: U.S. Financial Institutions’ Spending on Rewards ($ Billion), 2007-2013F
CAGR (’10E-’13F)
10.6%
25
22.7
20.8
20 18.9
Rewards Spending ($ Billion)
16.8
15.4
15 14.2
12.0
10
5
0
2007 2008 2009E 2010E 2011E 2012F 2013F
Source: Capgemini Analysis, 2011; Aite Group Report, 2009
Most of the big banks offer rewards program on their cards in a market
characterized by growing commoditization of card rewards programs. This
growing proliferation and commoditization has resulted in a decrease in the
perceived value of loyalty programs by the end consumer, which has prompted
marketers to look for innovative programs that are better able to deal with the
emerging challenges in the loyalty industry. Furthermore, effective management of
loyalty costs and program profitability has also become an important factor in the
overall success of a loyalty program.
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5. the way we see it
2 History of Loyalty
Programs
One of the early efforts to encourage customer loyalty began in 1896 when Sperry
and Hutchinson started the S&H Green Stamps program. Retail organizations
bought the stamps from S&H and gave them as bonuses to shoppers based on the
dollar amount of a purchase. In 1938, the Gold Bond Stamp Company created
Gold Bond Stamps which merchants gave out when customers purchased a certain
amount of goods to be redeemed later for merchandise.
The modern history of rewards programs began in the 1980, when American
Airlines® introduced AAdvantage® in 1981, a frequent flyer program, followed by
many other airlines introducing their own frequent flyer schemes by teaming up
with hotels, rental car companies, and credit card issuers. Even though credit cards
had made their appearance in the 1950s, the first card-based rewards program
was introduced in 1984 by the Diners Club® which was called the Diners Club
Rewards®. Discover® introduced the first cash-back product in 1986 and was
followed by Citibank® introducing the AAdvantage card in 19882.
In the 1990s, credit card rewards programs such as American Express®
Membership Rewards, started offering a variety of redemption options that included
travel, dining, and hotels. From 1995 onwards, there has been a proliferation
of rewards programs and co-branded cards. More than 40 percent of all Visa
and MasterCard credit cards have a rewards program tied to them.3 The average
consumer now holds various debit and credit cards, along with the various loyalty
programs associated with them. To illustrate this, there were 1.8 billion loyalty
program memberships in the U.S. in 2008, with an average U.S. household
participating in 14 rewards programs.4
From 2005 onwards, there has been a growth in innovative loyalty programs
as financial services institutions realize the need to differentiate in a saturated
loyalty market. In 2005, Citibank® launched its ThankYou® free rewards
program which integrates card and banking rewards. Barclays launched its
Freedom reward program in 2010, a cash back program which directly earns
reward money for customers.
2
Source; “The Future of Credit Card Rewards Programs”, Fischer Jordan, 2006-07
3
Cardweb.com, 2009
4
Colloquy, 2009
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 5

6. 3 Loyalty Program Design
A typical loyalty management system is comprised of various operational
parameters—such as transaction types, program design, and funding options. It also
A Loyalty Management System includes value parameters such as redemption options, redemption thresholds, and
earn rates.
needs to evolve the right mix of
program funding options and
redemption options in order to
become not only self-sustaining Exhibit 3: Composition of Typical Loyalty Management System
but also profitable. The benefits of
various program
Merchant Merchant- design options
Issuer Funded as well as loyalty
Funded Issuer Mix redemption options
Operational are explained further
Parameters in Exhibit 4
Transaction Funding Annual Points Transaction
Types Options Cap Points Cap
Redemption Redemption
Life of Points Earn Rates
Options Thresholds
Value
Parameters
Points Rebates Discounts
Source: Capgemini Analysis, 2011
Loyalty programs use a variety of program design and funding options, such as a
mix of issuer and merchant-funded options, in order to reduce and distribute their
loyalty costs among various participants (Exhibit 4). The three most commonly
adopted program design options are coalitions, partnerships, and white labeling.
Of all the three program design options, coalition programs are the most attractive
for financial services institutions as it helps them distribute the costs of running the
loyalty program among the various coalition partners.
Similarly, loyalty programs use a variety of redemption options in the form of
points, rebates, cash back, and discounts, or a combination of these elements. The
cash-back option is gaining currency these days with some top loyalty programs,
including Discover® Card and Barclaycard, introducing them in order to provide
instant gratification to the consumer.

7. the way we see it
Exhibit 4: Loyalty Program Design and Redemption Options
Coalition Formed by issuers partnering with non-credit
card merchants that helps in distributing
Programs
administrative expenses
Program Association/
Involves partnering between major issuer
Design rewards programs and associations to create
Partnership
Options a program with large scale
Involves established rewards issuers using their
White Labeling own programs to manage FSIs loyalty programs
without external use of the brand name
Rebate Programs/ Participants accrue financial benefits from
purchases that are saved up and redeemed
Cash Back
after a set threshold or time period
Loyalty Discount These provide a specified percentage or a
Redemption
Programs fixed amount off on the retail purchase price
Options
Consumers earn additional points by buying
Points Program goods and services using the card at certain
specified merchants
ATTRACTIVENESS
HIGH MEDIUM LOW
Source: Capgemini Analysis, 2011; “The Future of Credit Card Rewards Programs”, FischerJordan, 2007;
www.crmtrends.com, 2011
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 7

8. 4 Key Operational Challenges
in Loyalty Management:
Improvement Opportunities
Loyalty management systems form the core of a loyalty program. These systems
need to be systematically updated to keep pace with the emerging business
and operational trends and challenges in the loyalty industry around program
administration, cost efficiency, customer acquisition, and customer retention.
4.1. Operational Trends in Loyalty Program Offerings
Loyalty programs look for growth by expanding coverage to everyday
consumer purchases
Loyalty programs now provide an opportunity to earn points on everyday
transactions such as banking, grocery shopping, dining, and fuel purchasing.
They provide customers with an easy way to keep track of their reward
money through an online, dedicated rewards-tracking website. They also offer
information to customers about the local retailers where they can earn or redeem
their reward points.
Programs introduce innovative rewards to increase response rates
Loyalty programs are now introducing experiential rewards that emphasize event-
based or lifestyle offers instead of the traditional discount-driven approach. These
experiential rewards carry a higher perceived value for the cardholder and help
increase response rates to rewards program. Card loyalty programs may also allow
points earned on purchases to be gifted to someone, used as entry to special events,
or redeemed as points for music download.
Financial services institutions put an enhanced focus on the customer to
improve retention
Loyalty programs have begun to take a more holistic view of customers by focusing
more on customer service and broadening the range of awards and recognitions.
Loyalty programs have become more segmented by targeting different life stages, life
styles, and interests.
Financial services institutions focus on coalition building to bring down
loyalty costs
A collaborative approach to rewards is increasingly being followed, where two or
more companies come together to share branding, operational costs, marketing
expenses, and data ownership of a common loyalty currency.
Coalitions allow consumers to earn and redeem a branded currency across a
network of merchants. Niche interest-based coalitions are growing which bring
like-minded participants together with a common currency that can be earned and
redeemed within a specific category of businesses.
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9. the way we see it
Regional coalitions are in development, which encourage participants to patronize
local businesses and earn points on everyday purchases toward merchandise
rewards or discounts. For instance, the Nectar coalition is now the largest
loyalty program in U.K. where American Express is the issuer and coalition
partners include Sainsbury’ s (grocery chain), BP (gas retailer), and Debenhams
(departmental store).
4.2. Key Operational Challenges and Recommendations
The main operational drivers of a loyalty program are improving profitability,
increasing growth, and improving program cost efficiency.
Higher profitability is achieved when loyalty programs improve the incremental
revenue spend and motivate the customer to spend on products with better
margins. The growth of a loyalty program is tied to marketing efforts which should
be targeted and innovative in order to connect with customers in an increasingly
saturated market. Cost efficiency is achieved with the help of analytics and
technology outsourcing.
Exhibit 5: Key Operational Drivers of Loyalty for FSIs
Loyalty
Profitability Growth Cost Efficiency
Increase
Increase Spend Penetration and Increase Scale
Response
Improve Minimize Client
Distribute Costs
Margins Attrition
Innovative Upgrade
Better Targeting
Marketing Technology
Source: Capgemini Analysis, 2011
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 9

10. Challenge #1: Programs need to target profitable customer behavior
Loyalty programs need to be properly targeted in order to derive maximum benefit.
Loyalty customers are usually grouped into three tiers. Tier 1 consists of the most
profitable customers who engage in high-value spend. Tier 2 consists of break-even
customers, while Tier 3, which lies at the bottom, mainly consists of unprofitable
customers and ‘Free Riders’ (customers who enjoy benefits without increasing
spending) constituting up to 50% of the total customer base.
Recommendation #1: Use marketing analytics to identify profitable customer
behaviour and build targeted programs
Card issuers should use analytics to focus on the most loyal customers and build
loyalty programs around profitable customer behavior, while phasing out card
programs that do not deliver the right value.
Challenge #2: Firms need to improve customer acquisition and retention
To encourage consumers to use loyalty cards, the rewards have to have significant
value for the consumer. In order to help cardholders understand the value of
such programs, issuers need to engage in innovative marketing and ongoing
communication with the customer.
Traditionally, rewards program have been used as a strategy by card companies
to improve customer acquisition and retention. However, due to a proliferation of
rewards program in the market as well as increasing program commoditization, the
customer response rates to reward card offers has been declining. The issuers are
thus faced with the problem of competing in a mature market where it is becoming
difficult to further increase the card customer base.
Recommendation #2: Reach out to the customer through new channels, such
as mobile and social media
Online social and mobile channels make it easier for issuers to connect with loyalty
program members and their social networks of friends and followers to help to
increase the customer base and card usage.
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11. the way we see it
Challenge #3: Firms need to improve cost efficiency
Financial institutions need to optimize program costs in order to break even and
generate profits. Generally larger issuers have greater economies of scale. A low
scale program presents a cost challenge in managing administration and redemption
expenses. Program administration costs have also increased along with the rise in
complexity of loyalty programs.
Program administration costs range anywhere between 10-20% of the overall loyalty
costs, and come down to 2-5% with an increase in the customer base and loyalty
program spend due to the advantages of economies of scale5. Issuers adopt various
business models in order to distribute program costs among various participants.
Recommendation #3: Focus on loyalty management to improve administrative
efficiency
In order to improve administrative efficiency, issuers need to focus on loyalty
program design and management to minimize administration costs by using
coalitions and partnerships, customer analytics, technology, and outsourcing of
loyalty management solutions.
5
Capgemini Analysis, 2011
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 11

12. 5 Recent Market Trends
and Regulations: Impact
on Loyalty Economics
The impact of the financial crisis has been significant on the card industry. A
number of debit and credit card regulations governing banks, payments, and card
programs will have an impact on the bottom line of rewards programs.
5.1. Market Trends Affecting Card Loyalty Programs
New market regulations are likely to force banks to restructure their rewards
program portfolio and push consumers to credit cards. Two of the recent
regulations impacting the card industry are the Credit CARD Act of 2009 and the
2010 Durbin Amendment.
Recent debit card regulations will reduce the profitability of debit transactions
by negatively impacting interchange fees
In the U.S., the debit card market has seen two new regulations in 2010 that
are likely to have an impact on the economics of rewards programs. The first
regulation, Reg E, has mandated an opt-in approach to overdraft coverage, and has
stated that a bank can no longer provide and charge the customer for the overdraft
of non-recurring debit card transactions without opt-in authorization. The second
regulation, the Durbin amendment, will significantly limit the revenue that banks
generate through interchange fees from debit card transactions6.
Larger banks will therefore be forced to phase out traditional debit-based rewards
programs and move from interchange-funded debit programs to merchant-funded
rewards. As an example, JPMorgan Chase has announced this year in March that it
will terminate its debit rewards program in July to reduce losses from the proposed
cap on interchange fees.
Recent credit card regulations have imposed additional consumer safeguards
The Credit CARD (Accountability Responsibility and Disclosure) Act of 2009
in the U.S. has led to extensive reforms in credit cards and gift cards, and seeks to
protect the interests of the cardholders from excessive fees, misleading terms, and
arbitrary interest rate increases. As card regulations become tighter, there will be an
operational and regulatory impact on credit-card based rewards program. The law
may lead to the return of annual fees on credit cards.
Before the act came into force, credit card companies could change rates, rewards
programs, and other terms of the card agreement at any time without giving any
reason or prior notice. The new law requires that credit card companies give a
45-day notice before making such changes. Hence card holders now get 45 days
in which to use their reward points, instead of having their accrued reward points
being reduced or forfeited completely.
Changes in Merchant Service Charges (MSC) in Europe will impact bundling
of card reward programs and interchange fees for issuer banks.
Merchant Service Charge (MSC) is a fee that retailers or merchants pay to their
acquiring banks for processing VISA/MasterCard transactions. However, from
January 2011, all European acquirers now have to offer unbundled merchant
6
Aite Group, 2011
12

13. the way we see it
service charges (MSC) due to a 2009 agreement forced by European Commission
between VISA and MasterCard. European acquirer banks would no longer be able
to combine all debit and/or credit products and must specify the merchant service
charges according to each card scheme and card program. Combined with the
recent lowering in the debit card interchange rates by MasterCard and Visa Europe,
unbundling will lead to a further lowering of merchant service charges. However,
merchants may still end up paying more for acquirer services. Since interchange
fees for the issuer bank comprises mainly of the merchant service charges, it is also
likely to get affected.
5.2. Key Market Challenges and Recommendations
Loyalty programs now have to deal with various emerging market challenges. In
mature economies, penetration rates for cards have come down while the new
business and regulatory environment has negatively impacted the economics of the
card industry.
Exhibit 6: Loyalty Market Penetrations in Different Global Regions
Region Penetration
North ■ The American loyalty market has become mature due to many existing card loyalty programs and high penetration levels with
America the average adopter holding two credit cards earning rewards
■ The recently passed Credit CARD Act and Durbin Amendment have put additional pressure on banks to push for new and
innovative loyalty card programs
Europe ■ The European card market is not fully mature with the exception of the U.K. where consumer penetration of loyalty programs
has reached 85%
■ Recent regulations like RDR in U.K. and debit card interchange regulations in Europe will impact card programs through
increasing regulations and reduction in interchange fees for both acquiring and issuing banks
Latin ■ Card transactions have grown consistently over the past three years in Latin America, particularly in developing economies
America such as Brazil and Mexico
■ Latin America offers unique opportunities for online stores to establish collaborative incentive programs backed by deep-
pocketed off-line players pursuing online consumers
Asia- ■ The region is experiencing high growth rates in card transactions, particularly in countries such as China, India, and Japan
Pacific
■ The growth in card transactions has been fuelled by lifestyle shopping due to increasing middle-class incomes, presenting
significant growth potential for loyalty programs
Source: Capgemini Analysis, 2011
Challenge # 4: Loyalty programs are becoming commoditized in mature markets
There has been a proliferation in loyalty programs since 2001, with banks trying to
lure customers in the face of a maturing cards market. Loyalty scheme penetration
rates in mature markets have begun to taper off due to the commoditization of
loyalty programs. Companies are now forced to look for new ways to differentiate
their loyalty programs from competing card programs.
Recommendation #4: Expand to new regional markets and newer channels,
such as online and mobile
Loyalty programs need to expand the customer base by focusing on emerging
markets such as Asia-Pacific where card adoption is still rising and customer
spend is increasing. Adoption of newer channels such as online and mobile will
also expand the customer base.
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 13

14. Exhibit 7: Global Regional Cards Market - Transaction Value (€ Billion), 2005-2009
CAGR
(’05-’09)
Total 8.4%
3,000
2,686 2,669 2,714
2,633 North America 4.0%
2,500 2,316
Asia-Pacific 24.1%
Transaction Value (€ Billion)
2,000
1,727 Europe 4.1%
1,533 1,559
1,452
1,500 1,328
1,560 Latin America 14.7%
1,141
969 1,338
1,000
729
500
100 108 133 158 172
0
2005 2006 2007 2008 2009
Source: Capgemini Analysis, 2011; World Payments Report, 2011, Capgemini
Challenge #5: Perceived value of rewards programs is on the decline
For a consumer, the perceived value of traditional rewards programs has been on
a decline. Loyalty programs have become over-saturated in mature markets, which
have led to lower acquisition response rates to rewards card offers. Since most
of the rewards programs offer similar value propositions, attracting and retaining
customers has become harder. In an increasingly over-saturated and competitive
market, card programs may become more focused on differentiation and innovation
rather than rewards.
Recommendation #5: Use alternative channels such as social media to reach
out to the younger generation
Using social media, points earned via social networking (social currency) can be
gifted to friends and family within the network, engendering customer loyalty and
enhancing customer satisfaction with the loyalty program.
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15. the way we see it
Challenge #6: Credit card usage in terms of purchase volume has come down
due to the impact of the financial crisis
Due to elevated personal debt levels in mature markets, customers are now
decreasing their credit card usage. As a result, card issuers are grappling with
customer attrition and retention issues. Developed markets are seeing a change in
consumer attitude in terms of cards usage post crisis, with debit card usage rising in
comparison to credit cards.
Recommendation #6: Introduce innovative and relationship based rewards
programs to enhance credit card usage
Innovative reward card features such as cash-back rewards, flexibility in
redemption options, and experiential rewards can provide incentives to consumers
to adopt loyalty cards, and use these cards for purchase as compared to cash and
other non-cash transactions.
Introduce relationship-based card rewards program that would reward the
cardholder for utilizing a variety of banking products and services.
Exhibit 8: Purchase Volume at Merchants on U.S. General Purpose Cards (%),
2000, 2005, and 2010
1% 3%
100% Prepaid
23%
80% 34%
44% Debit
Volume (%)
60%
40% 77%
65%
53% Credit
20%
0%
2000 2005 2010
Source: Capgemini Analysis, 2011; The Nilson Report, May-July 2011
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 15

16. Challenge #7: The number of credit and debit card regulations continue
to grow
The recently passed Durbin amendment and the Credit CARD Act of 2009 would
have an adverse impact on the ability of issuers to extend rewards on both debt
and credit card offers. The Credit CARD Act in U.S. and the RDR in U.K. impose
stringent checks and regulations on credit card operations, including card selling
through financial advisors.
The Durbin Amendment will put additional pressure on U.S. banks as financial
services institutions will see a reduction in their interchange fee and a consequent
impact on their margins. Similarly, the BASEL II/III regulations will significantly
push up the funding cost for banks and thus impact the margins on card
transactions for banks.
Recommendation #7: Design rewards programs for higher margin debit and
credit cards and introduce membership fees
Financial services institutions need to introduce rewards programs that would
provide incentives to the consumer for using higher margin debit and credit cards.
They can also charge a certain upfront membership fee or an annual fee from the
card holder for availing of reward benefits. While rewarding the customers, firms
also need to push cross-selling for their banking products.
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17. the way we see it
6 Emerging Technology
Trends: Implications for
Financial Services Institutions
Financial firms need to revamp their business models based on emerging
technologies and shifting customer preferences towards redemption options,
including real-time redemption through the online channel, mobile channel, and
social media.
6.1. Technology Trends Driving Changes in Loyalty Programs
Real-time technology is leading to the growth of mobile rewards
The growth of wireless-enabled devices has enabled loyalty card programs to
deliver offers and coupons directly to the consumer in real-time in the form of
mobile coupons. This has been made possible by the use of online and real-
time technologies such as radio frequency identification (RFID), near field
communication (NFC), and real-time point-of-sale (POS). NFC technology allows
for simplified transactions, data exchange, and wireless communications between
two devices in close proximity. These real-time technologies use smartphone devices
embedded with NFC chips to engage with the consumer through direct mobile-
based applications or location-based services.
Programs are leveraging mobile and contactless payments
Contactless mobile payments have been rising as adoption of smartphones based on
NFC and microSD card technology, and smartphone applications such as Google
Wallet7, increasingly gains acceptance in the marketplace. Loyalty programs should
be built around the growing acceptance and usage of mobile payments as they can
be used to deliver coupons over the network, assisted by GPS.
Dual interface EMV cards are on the rise
Dual interface EMV8 cards provide customers with the convenience to use the
card at any merchant outlet, as it can handle both contact as well as contactless
chip transactions. The use of a chip-card reader or a magstripe reader provides for
universal acceptance of cards and provides enhanced convenience to card holders
and merchants alike.
U.S. Bank has become one of the first major banks in the United States to use an
EMV card when it announced that it would issue 20,000 Visa-branded EMV credit
cards that would cater to its Flexiperks® Travel Rewards card.9
Loyalty programs are expanding their presence in online social networks to
increase brand awareness
With the growth in online social networking sites, loyalty programs are increasingly
using online social channels to increase brand awareness. Social channels provide
easy access to existing loyalty program members and to their online networks.
7
Google Wallet is an Android app that stores virtual versions of the credit cards for use at checkout
8
EMV stands for Europay, MasterCard and Visa, a global standard for authenticating debit and credit card transactions
9
NFC Times, June 10, 2011
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 17

18. Card issuers reward program members by giving them points and discounts
to interact with their brands by “liking” them on Facebook, “following” them
on Twitter, watching exclusive videos on YouTube, and making product
recommendations to their friends. Companies such as Social Rewards leverage
loyalty program members who have social media tendencies for tweeting, sharing,
and liking special deals.
In another example, American Express Membership Rewards® encourages its
members to join American Express on Facebook to get the latest updates on
offers and events, follow them on Twitter, and watch exclusive program videos on
YouTube.
6.2. Key Technological Challenges and Recommendations
Loyalty programs now have to deal with emerging technologies in mobile
and online channels which have increased the complexity of loyalty program
administration, implementation, and measurement across the loyalty management
lifecycle.
Exhibit 9: Loyalty Program Lifecycle and Impact Areas on Loyalty Management
Operational Loyalty Platform
Requirements
Design
Market Implement
Loyalty
Requirements Loyalty
Program
Program Front Office
Solutions
Technology
Requirements
Measure
Performance of
Program Business
Analytics Intelligence
Source: Capgemini Analysis, 2011
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19. the way we see it
Challenge # 8: Redemption through various payment channels is taking place
Loyalty programs allow their members to be rewarded instantly using real-time POS
at merchant outlets for discounts, merchandise, or services. The online channel
allows customers to redeem reward points using a variety of travel, lifestyle, and
leisure options. Mobile channel payments allow redemptions based on contactless
transactions and various mobile-based applications.
Payment providers such as PayPal™ and Google Wallet are providing loyalty
programs to attract customers to use their payment systems. Financial services
institutions therefore need to introduce flexible ways to redeem reward points by
integrating various redemption channel options—such as online, merchant outlets,
and mobile phones—into their rewards programs.
Recommendation #8: Invest in emerging technology and technology upgrades
As mobile payments see significant growth, loyalty programs will have to expand
their technology systems to incorporate NFC technology, smart cards, RFID,
and emerging payment applications such as PayPal and Google Wallet, into their
overall program platform.
Challenge #9: Online Rewards Management is becoming increasingly
sophisticated
Loyalty programs increasingly allow consumers to manage their card accounts
online, redeem or transfer reward points, and select between various reward options
across a variety of new lifestyle options such as music and online social games.
Through the online channel, members can also share reward points or gift them to
their friends and family who are also members of the program. A host of customer-
driven features have thus enhanced the complexity of the customer interface and
have put additional technology demands on managing the loyalty system.
Recommendation #9: Outsource program implementation to IT vendors
With an increasing focus on emerging customer and technology requirements,
issuers must invest in online technology or outsource their loyalty management
platforms to vendors to help in bringing down the go-to-market time and keep
online services up to date.
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 19

20. Challenge #10: Social and mobile rewards are growing
Mobile coupons and rewards are gaining popularity as new smartphone applications
evolve to manage multiple loyalty programs. Loyalty programs must therefore be
able to deliver offers and coupons directly to the consumer in real-time through
wireless-enabled devices using various mobile based applications such as Google
Wallet and Foursquare. Foursquare is a web and mobile application that allows
registered users to connect to friends and update their location.
R
ecommendation #10: Integrate various channels on a single platform to get
a unified customer view in real-time
Issuers need to run rewards program on a single platform which will incorporate
social, mobile, online, and location-based GPS technology in their overall program
architecture.
Challenge #11: Loyalty measurement is becoming increasingly complex
Consumers share large amounts of quantitative and qualitative data with financial
services institutions while enrolling in a loyalty program and while making
purchases and redemption. Measurement is essential to understanding the impact
of new channels or technology, and needs continuous refinement in metrics and
measurement techniques. It is becoming increasingly complex to measure the
impact of new channels such as online, mobile, and social, on incremental customer
spend and customer satisfaction improvement.
Recommendation #11: Use marketing analytics and business intelligence to
measure loyalty program parameters
Analytics and CRM solutions provide insights into customer behavior and use
tools of business intelligence, such as data mining, to identify trends that feed into
targeted loyalty campaigns and innovative future program offerings.
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21. the way we see it
7 Loyalty Management
Solutions for Financial
Services Institutions
Financial firms would have to effectively manage customer data, customer
intelligence, and measurement in order to derive the maximum benefit from
their loyalty programs. The measurement of key performance metrics helps the
A holistic loyalty management issuer to analyze the success or failure of their programs and helps in designing
system needs to incorporate the better programs.
program design, management,
and measurement aspects into Use of effective point-of-sale (POS) solutions such as offer management and rich
its overall solution architecture. customer interface, and back office solutions including business intelligence
and data management can improve overall loyalty management. Use of industry
packages and outsourcing can help in reducing program development and
maintenance costs and free firms to focus more on designing the loyalty program.
Exhibit 10: Key Metrics for Loyalty Measurement
Human
Resource
Financial Customer
(incremental Penetration and
revenue) Key Retention
Performance
Metrics
Supplier
Transaction
Penetration
Penetration
(no. of
(response
merchants,
rates)
retailers)
Source: Capgemini Analysis, 2011
7.1. Point-of-Sale Solutions
FSIs would have to incorporate emerging technologies and consumer requirements
into their loyalty program design and solutions. This includes constant upgrading of
the offer management system and the customer interface.
Offer Management
Issuers would have to put in place innovative financial relationship-based rewards
schemes which have high-perceived value for the customer and target them with
the relevant offers. Rich segmentation based on customer analytics will help in
identifying and targeting those customers who can be taken to the next level of
spending. Furthermore, predictive models can be used to identify the right offers
for each member and target members with individualized offers.
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 21

22. Customer Interface
The growth in payment and redemption channels has caused loyalty management
systems to incorporate a multi-media platform to send and receive messages via
web, email, phone, SMS, or MMS.
With the growth in online management of rewards programs, web hosting would
have to incorporate various services such as online rewards tracking and various
redemption options, transfer and sharing of reward points, and payment of a mix of
reward points and cash.
7.2. Back Office Solutions
By using business intelligence and data management, issuers can obtain insights into
their loyalty programs which will help improve program economics and offerings.
Analytics also helps to improve customer segmentation, target profitable customers,
and tailor program offerings to meet the end consumer needs.
Business Intelligence
Business intelligence uses data mining tools such as clustering and association10
to transform raw data and provide valuable insights into customer spend
behavior—leading to better targeting of loyalty programs. Business intelligence
helps to identify customers based on spend behavior and customer segmentation.
This knowledge is essential to target the right customers with appropriate,
individualized program offerings.
Data Management
Issuers generate a large quantity of customer data from their loyalty programs. This
data is a mix of transactional, historical or demographic, as well as qualitative and
quantitative. Such a large amount of varied data needs to be stored in an integrated
data warehouse, and easily accessible to data mining and analytics applications. Data
management therefore becomes central to improve the relevance and timeliness of
the various program offerings.
10
Clustering makes use of meaningful or useful cluster of objects that have similar characteristic. In association, a pattern
is discovered based on a relationship of a particular item on other items in the same transaction
22

23. the way we see it
8 Conclusion
Loyalty management systems have become essential to driving the profitability of
a loyalty program. In the present environment which is characterized by changing
consumer preference, new regulatory demands, and increasing technological
sophistication, loyalty management is turning out to be crucial in terms of managing
various types of loyalty programs. For an issuer, effective management of its
Financial services institutions portfolio of loyalty programs has become a key differentiator in a market that is
would have to continuously characterized by saturation, competition, and increasing regulations.
evolve and improve their
loyalty programs to keep Financial services institutions would have to continuously evolve and improve
pace with rapidly evolving their loyalty programs to keep pace with rapidly evolving operational, market,
business, market and and technology requirements. The next-generation loyalty management systems
technology requirements. would also be more flexible, adaptable, and state-of-the-art so that they can deliver
loyalty programs in a real-time and self-service mode to customers. Our analysis has
identified 11 key recommendations that issuers can consider in order to drive more
value from their current or proposed loyalty programs.
In the present challenging times, when consumer confidence is at a low, innovative
loyalty programs can be an effective means by which financial services institutions
can win back client trust and enhance customer satisfaction.
Next Generation Loyalty Management Systems: Trends, Challenges, and Recommendations 23

24. www.capgemini.com/cards
About the Author
Rishi Yadav is a Senior Consultant in Capgemini’s Strategic Analysis Group within the
Global Financial Services Market Intelligence team. He has more than eight years of
experience in strategy, business, and technology consulting for financial services clients
across banking, insurance, and capital markets.
The author would like to thank Salil Hajarnis, Vilas Kshirsagar, Kripashankar
Rajappa, Prasanth Perumparambil, David Wilson and William Sullivan for their
contributions to this publication.
For more information, visit www.capgemini.com/cards or e-mail
cards@capgemini.com.
About Capgemini and the
Collaborative Business Experience
Capgemini, one of the Present in 40 countries, Capgemini reported
world’s foremost providers 2011 global revenues of EUR 9.7 billion and
of consulting, technology and outsourcing employs around 120,000 people worldwide.
services, enables its clients to transform
About Capgemini
and perform through technologies. and the Global Financial Services
Capgemini’s
Business Unit brings deep industry
Collaborative Business Experience
experience, innovative service offerings and
Capgemini provides its clients with
insights and capabilities that boost their next generation global delivery to serve the
Capgemini, one of the Present inservices industry.
financial 40 countries, Capgemini reported
freedom to achieve superior results
world’s foremost providers 2011 global revenues of EUR 9.7 billion and
through a unique way of working, the
of consulting, technology and outsourcing employsnetwork 120,000 people worldwide.
With a around of 21,000 professionals
Collaborative Business Experience™. serving over 900 clients worldwide,
services, enables its clients to transform Capgemini’s collaborates with leading banks,
and performrelies on its global delivery
The Group through technologies. Capgemini Global Financial Services
Business Unit capital market companies to
insurers and brings deep industry
model called Rightshore®, which aims to experience, innovative service offeringsthought
Capgemini provides its clients with
get the right balance of the best talent deliver business and IT solutions and and
insights and capabilities that boost their next generation global delivery tovalue. the
leadership which create tangible serve
from multiple locations, working as one financial services industry.
freedom to achieve superior results
team to create and deliver the optimum For more information please visit
through a unique way of working, the With a network of 21,000 professionals
solution for clients. www.capgemini.com/financialservices
Collaborative Business Experience™. serving over 900 clients worldwide,
The Group relies on its global delivery Capgemini collaborates with leading banks,
model called Rightshore®, which aims to insurers and capital market companies to
Copyright © 2012 Capgemini. All rights reserved.
deliver business and IT solutions and thought
get the right balance of the best talent
from multiple locations, working as one leadership which create tangible value.
team to create and deliver the optimum For more information please visit
solution for clients. www.capgemini.com/financialservices
All products or company names mentioned in this document are trademarks or
registered trademarks of their respective owners.
Copyright © 2012 Capgemini. All rights reserved.